Story highlights

Spending in most of Asia, the Middle East, Russia, Latin America and north Africa rose

US share of global military spending fell below 40 per cent

World military spending last year fell for the first time in 14 years, with the US share of the global total slipping below 40 per cent.

The world spent $1.75tn on its militaries in 2012 -- equivalent to 2.5 per cent of GDP or about $250 a person, a 0.5 per cent decrease in real terms from 2011, the Stockholm International Peace Research Institute said in its annual review published on Monday.

Spending in China, much of the rest of Asia, the Middle East, Russia, Latin America and north Africa rose, while in Europe and the US it declined as austerity measures hit budgets and the end of the wars in Afghanistan and Iraq shrunk discretionary defence spending.

Though the US still boasts the world's most powerful and well-funded military, the growing spending power of countries outside the OECD is shifting the military balance of power, especially in China, posing a challenge to regional and western political and military leaders.

The shift in military spending from west to east is also affecting the world's biggest western defence contractors. Not only are their traditional markets, such as the US and Europe, shrinking, but Chinese and Russian companies, buoyed by their governments' investments, are making inroads in overseas markets, making it more difficult for companies such as Lockheed Martin and BAE to make up lost ground by selling internationally.

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Sam Perlo-Freeman, director of SIPRI's Military Expenditure and Arms Production Programme, said: "We are seeing what may be the beginning of a shift in the balance of world military spending from the rich Western countries to emerging regions, as austerity policies and the drawdown in Afghanistan reduce spending in the former, while economic growth funds continue increases elsewhere.'

Nowhere is this shift more closely watched than in the US and China. As the US slashes its defence spending in protracted negotiations about how to reduce its fiscal deficit, China continues to invest heavily. From 2003 to 2012 China's military spending rose 175 per cent in real terms, the largest increase among the world's top 15 spenders. Last year China spent $166bn, up 7.8 per cent from the previous year in real terms.

The results are beginning to show. Beijing recently launched its first aircraft carrier and tested a stealth jet fighter that appears to be more advanced than US defence executives had expected. It also showed off its latest fighter drone at last year's Air Show in Zhuhai. Moreover it poses the single biggest national cyber espionage threat.

Even though the rate at which Asia's military expenditure is growing has slowed in recent years, China's dominance and tensions over the South and East China Seas continue to fuel regional spending and prompted the US to shift its strategy in Asia.

The growth of China's defence industry has also been felt further afield. Last year China ousted the UK as the world's fifth-largest arms exporter, in large part because of exports to Pakistan.

Meanwhile, companies such as Lockheed Martin and Northrop Grumman of the US and the UK's BAE Systems face a triple challenge: fiscal austerity is shrinking their home markets; they face more competition for oversees markets and they are all but shut out from the two fastest growing big markets: China, because of sanctions prohibiting military sales there, and Russia because it strongly favours domestic production.

Overall, Sipri expects world military spending to continue to fall until the global economy recovers, further demonstrating the fact that the industry is driven by the amount of money available to governments as much as by their perceived need for the equipment.